GameStop may be struggling, but one analyst says the “deeply discounted valuation” is missing some key elements to the chain’s potential.

Jefferies initiated research coverage of the stock Monday with a surprisingly bullish outlook. The firm told clients it could reach $US18 in the next year – 18% above Friday’s closing price of $US15 – by focusing on consoles and community rather than on games.

Shares of the video-game retailer have fallen more than 70% from 2013 high of $US57.74 a share as publishers have moved to a model that sells to players via online stores, cutting out middle-men like GameStop. Digital downloads, not physical disks, now make up a majority of video-game purchases, a nearly exact reciprocal to the situation a decade prior.

Jefferies

GameStop’s earnings have fallen 87% since 2011, and hit a low of $US2.02 a share for the final quarter of 2018. Jefferies, along with other analysts polled by Bloomberg, think this should increase to above $US3 when the chain reports its first-quarter results in August, following other retailers that have seen surprising growth in the face of the “retail apocalypse.”

“We’ve observed meaningful valuation expansion across retailers where margin rates base, pricing power returns (inventory & markdown clean-up), and sector participation/consumption is healthy,” Wissink says. “GME has not participated in this reversal, trading at 2x EBITDA vs. 5x-8x group, due in part to leadership turnover, lack of a articulated vision & direction, and overriding fears around software profit dependence.”

Shares of GameStop were up 4% in early trading Monday following Jefferies’ initiation. The stock is down 17% this year.